To protect the euro zone from future financial crises, the EU commission wants to make it easier to sell bundled government bonds in the future.
Banks are to be able to buy up bonds from various euro countries, bundle them and sell them on to investors without having to meet stricter conditions – such as additional equity capital – the EU commission announced in brussels on thursday. The EU member states and the european parliament had to approve the proposals by a majority in order for them to be implemented. Criticism has already been voiced from germany.
In the view of the EU commission, the close links between major national banks and their respective states pose a major security risk. Banks mostly hold bonds issued by their respective national governments. If the state gets into difficulties, this can have fatal consequences for the banking sector and ultimately for the entire economy of the country – as was the case, for example, during the financial crisis in greece.
A number of rules are now to apply to so-called SBBS (sovereign bond-backed securities). In practice, a private company, which a bank had to establish specifically for the issuance and management of these securities, would buy, bundle and resell bonds issued by eurozone governments on the market.
According to current rules, these papers were treated much less favorably than individual euro government bonds. Banks have had to hold more equity if they want to issue bundled bonds. This unequal treatment, which the EU commission considers unjustified, is now to be eliminated.
The bundled government bond packages are now to include bonds from all 19 euro countries, but each depending on its economic strength. The so-called capital subscription key of the european central bank (ECB) is to be decisive here. Ultimately, this means that the bundled securities may contain a coarser proportion of safe securities – such as german government bonds – and only a smaller proportion of riskier securities.
It is not a matter of communitizing risks between euro states, the eu commission stressed. Only private investors bore the risk and any losses.
In germany, however, there is great concern about possible future communitizations. "The member states don’t want these papers, the market doesn’t want these papers, only the european commission wants them," said CSU member of the european parliament markus ferber. He thinks that the brussels authorities want to "get a fub for community liability into the tur" with securitized government bonds.
"If you really want to break the unholy link between struggling banks and struggling sovereigns, you have to start backing sovereign bonds with equity instead of creating new privileged asset classes. The past few years have clearly shown that government bonds are not risk-free," ferber continued.
"In principle, the efforts of the eu commission to break the close ties between banks and the respective national state finances are correct," said christian ossig, chief executive of the association of german banks. In practice, however, the proposals could have negative consequences. For example, it is an open question whether classic government bonds of the highly indebted euro countries will still be in demand.
"The benefit of sovereign bond-backed securities was allowed to be small, because the volume of government securities held by banks is not reduced by SBBS," said iris bethge, chief executive of the federal association of public banks.